Apple iPhone sales soar, but iPad sales slump

Investors looking for breakthrough product as iTime patent comes through

Apple CEO Tim Cook speaks at the Apple Worldwide Developers Conference in San Francisco on June 2. He released quarterly results with disappointing earnings, but a 45 per cent increase in iPhone sales in China. (Jeff Chiu/Associated Press)

Apple’s quarterly results released yesterday showed a sharp divide in where the company's strengths lie.

Sales of iPhones advanced 55 per cent in Brazil, Russia, India, and China – the emerging BRIC economies – while iPad sales fell 9.2 per cent on weak demand from North America and Europe.

Breaking its total revenue of $37.4 billion down by market, $14 billion came from North American in the quarter, the same as the previous quarter, and $8 billion from Europe, a 20 per cent drop, while about $6 billion came from the Chinese market.

The numbers highlight the importance of a breakthrough new product for Apple, which has plenty of room to grow in emerging markets but needs to reinforce its reputation for innovation in the developed world.

Analysts were surprised at the strong showing for iPhone, which has lost market share to cheaper Android products in the past year.

Total iPhone sales of 35.2 million in the third quarter marked a 13 per cent increase from the same time last year. The second quarter is often marked by lower sales, as people hold off on new device purchases anticipating the next version released in the fall.

Rapid growth in China

Nowhere in the world is Apple growing faster than in China, where its partnership with China Mobile gives it access to customers of the country’s biggest telecom carrier.

Sales in Europe and North America are larger, but China represents an opportunity for rapid growth as its cachet as a more “up-market” product wins over Chinese consumers.

Apple faces stiff competition in China, including much cheaper locally made phones.

But that is also true in North America, where both its iPads and iPhones are facing competition from cheaper devices, with cheaper wireless plans.

Apple’s recently announced partnership with IBM is aimed at doing a run around that disadvantage, but making it easier to use iPhones in the workplace.

IBM-Apple to halt slide

Cook said the “great marriage” with IBM is geared at developing enterprise-specific apps for iPhones and iPads for sale to corporations. This is a “huge opportunity,” Cook said in his conference call.

The corporate world leans heavily on desktop PCs and there has been less adoption of tablets, but the IBM hookup could help make applications that employees could use on iPad. IBM has agreed to sell iPads, as well as iPhones, to its corporate and government customers.

Part of this move is about getting customers back to the Apple "ecosystem," where Apple products work only with Apple apps and one another, said Walter Piecyk, an analyst with BTIG Research in New York.

"With the latest issue of iOS, they’re trying to get you back to that closed ecosystem, so not only using their phone, but their tablet and PCs," he said in an interview with CBC's The Lang & O'Leary Exchange.

“The big thing for us is getting the penetration number up, getting our products, iPhones and iPads and Macs in more people’s hands, and we think there’s a huge opportunity in enterprise to do that,” Cook said.

Apple shipped 13.3 million iPads in the latest quarter, a nine per cent drop from the same time last year and the second quarter of falling iPad sales.

Cook appeared sanguine about the decline, saying iPad was a relatively new product and only now penetrating emerging markets – the BRICs that could provide a renewed boost.

With Europe and North America representing the bulk of Apple sales, developing a new product that grabs the public imagination is critical.

iTime patent granted

Investors have been patient despite being disappointed with profit of $7.75 billion this quarter – with Apple stock holding its price of $97.53 on Wednesday, rather than gyrating in response to the earnings report.

Piecyk says investors have been watching Apple’s high level of research spending.

"They’re spending $400 million this quarter or over four per cent of revenue – we haven’t seen that level since ... the iPhone was launched," he said.

"There’s a lot of dollars and there’s a lot of talent that’s been acquired, so everyone’s watching what’s going to happen in the market."

The speculation is that its new iPhones will emerge this fall with a larger screen. But much of the excitement is reserved for the smartwatch that has been heavily tipped as its next breakthrough.

On Thursday, the U.S. Patent and Trademark Office awarded Apple a patent for a wrist-worn gadget with a touchscreen and ability to communicate with a smartphone. The product is labelled iTime, though the name iWatch may also be in play.

Apple's conference for developers earlier this year also opened up ideas about smart home applications — believed to be an important emerging area in technology.

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